this video is sponsored by incog visit the link in the description and use code Bagel to get 60% off an annual subscription hey everyone welcome to the plane Bagel I'm your host Richard coffin we're back again with another episode of everyone's favorite series investment analist watches obscure Finance film and ruins it by overe explaining the scenes real crowd pleaser on this channel today we're going over a movie based on the book of the same name Barbarians at the gate a 1993 film so a bit of an older one uh that's based on the 1980 eight
leveraged buyout of RJR niso a company that you might not initially recognize by name but whose products you've probably enjoyed before namely their key invention of Oreo cookies uh something they sold right alongside their other key product cigarettes cuz the 80s were a wild time now I can tell that you're all thrilled to hear about a movie you've never watched before about a company may have never heard of before uh but I've actually been wanting to cover this movie for quite some time because one uh the Takeover of J nisco was a pretty notable event
Not only was there quite a bit of drama at least relatively in the finance world but also it was the largest Takeover in corporate history at that point and the movie does a pretty good job of staying true to the events that transpired and even the characters that are involved and two the movie is chalk full of Finance jargon uh references to other big companies and uh Financial events that uh give us a lot to dig into and and kind of dissect here and that's exactly what I plan to do with this video today we'll
be covering the major plot points of the film talking about the different terms and the like that come up and just giving overall more context and background information about the things that uh transpire and in case it's not clear a spoiler alert we will be covering kind of the main storyline of the film just for those of you who had this on their list of two watch movies that they were surely going to get to but without further Ado let's hop into it the movie begins with an introduction to our main character Ross Johnson who
from a very young age a bit of a go-getter smooth sales man who by 1988 has become the CEO of RJR Nabisco with him attending a corporate event for the company with his wife and it's in this scene that we get introduced to a bunch of the main characters of the movie uh there's Charlie hugall the chairman of the board of directors effectively Ross's boss in a way the board of directors they're meant to represent the shareholders of publicly listed companies while they don't get involved with the day-to-day operations they can hire or fire Executives
determine compensation and decide ultimately whether to accept or reject takeover bids th'll matter for later there's also Ed Horan who works under Ross as the president of tobacco and Johnny grenis who works under Ross as the president of Nabisco the cookie side of the business with Johnny constantly pestering Ross about his excess with these events and his uh corporate spending just this kind of spending is crazy Ross oh John the company's making so much money we're green something that's a bit of a theme throughout the whole movie and pretty important to the plot uh because
Ross for his part really enjoys being flippant with company money giving Rolexes away to clients uh throwing big parties and even enjoying a fleet of his own private jets all of which is pretty accurate to the real Ross Johnson who was known for greatly increasing his own executive pay while working at companies uh and enjoying many company perks with him sort of developing this image as the epitome of corporate greed but at the event Ross appears to be well-liked again very personable with everyone there and we see people celebrating this news story played on the
TV around an individual Anthony Kone being awarded $400,000 in Damages by cigarette companies a tip for Tony chipone again a real lawsuit where Anthony sued tobacco companies for his wife's death from lung cancer that at the time was seen as a victory for big tobacco given that it really seemed to limit their liability uh in cases related to the dangers of cigarettes but the next day Ross is seemingly annoyed that the stock for the company despite this positive update hasn't really budged that's not really moving higher and at a company sponsored golf tournament one of
his investors pitches him on the idea of carrying out a leveraged buyout to try and solve the stagnant stock price with his friend Don suggesting that Ross meet up with Henry kravis because Henry's the best he was the first to do a company buyout he practically owns a patent on the process and again all these people are real Henry kravis is actually one of the ks of private Equity company KKR airmed that today manages over half a trillion dollars in assets under management and the movie does have a few scenes trying to explain how a
l vered biot Works uh including the golf tournament itself Ross's introductory dinner with Henry kvis where he gets pitched on the idea and then later when Ross's wife explicitly asks him to explain leveraged buyouts all a buyout means is that management the team that runs the company they buy out all the shareholders and the company goes from being public to being private uh but to quickly kind of summarize the high level idea to that point uh a leveraged buyout is when a group of investors raise a bunch of money most of which is debt hence
the name leveraged uh use that to buy what's typically a publicly listed company and then once they have private ownership of the business doing everything they can to raise profits uh raise cash and overall squeeze more money out of the business to pay down that debt it's a high risk but also High reward strategy given how little money investors are putting forward of their own capital and the potential upside if the company is able to pay down the debt with its own money and something that Henry kvis did play a pretty important role in popularizing
although uh technically he he didn't carry out the first one that was actually by a Lewis Coleman who acquired orcan Exterminating Company back in 1964 with just $11,000 of cash up front a strategy that at the time was actually referred to as a bootstrap acquisition as for why they called it that I don't know I think it has to do with the idea of pulling yourself up by your bootstraps or sort of making something out of nothing or very little but I'm not really sure uh so don't quote me on that anyway we see this
all explained as being an attractive offer for everyone involved the investors will get a higher stock price PR for their shares Henry kravis will charge a 1% management fee or basically get 1% of whatever the company ends up being sold for and Ross will continue to be able to run the company as Henry krais promises the way he sees fit uh and likely get some sort of payoff for being involved with the deal however as recently talked about on the channel leverag biots carried out by private Equity companies uh do have a bit of a
bad reputation for being ruthless with companies seeing their assets stripped and employees laid off all for the sake of slashing costs and squeezing more profit out of the business uh something that we actually see alluded to in this scene that's French for firing people isn't it Henry as few as possible of course few dozen 10,000 as I said as few as possible and on that sort of sketchy note in the next scene we get a glimpse of some of the corruption that's running rampant on Wall Street at the time with the new story playing in
the background about a junk bond trading specialist Michael milin uh which as a quick sort of fun fact actually holds a record for being one of the highest paid employees ever with him receiving compensation of over half a billion dollars in 1987 alone but in the scene we hear about his firm Drexel Burnham lomber uh being implicated with an Ivan bosi uh someone who's been charged with insider trading which will matter later and mind you when we talk about junk bonds we're talking about uh bonds issued to investors that are just high risk and during
the 80s they were a popular method for raising the money needed or specifically the debt needed for leveraged buyouts that kind of Easter egg aside however we see Ross ultimately sort of brush off the offer uh mostly because he's concerned that he won't be able to spend as much company money if he has private Equity investors sort of breathing down his neck trying to control costs and besides he believes that the company is about to see its stock price Skyrocket thanks to a new innovation that's bringing to the market premieres a new smokeless cigarette that
supposedly healthier than typical cigarettes again something the company did actually try to release to Revolution the industry with this supposedly non-cancer causing product that would heat up the tobacco inside the cigarette rather than burning it which as a fun fact here and a bit of subtle foreshadowing is often highlighted as one of the biggest product flops in US history for reasons that we see in the next scene as Ross hears back from early test uh survey results on the product they all said they tasted like like was the consensus yes sir so with Ross's key
Catalyst for the stock now completely underwater and I'm even potentially facing a firing over this we see him decide to proceed with a leveraged buyout but not with KKR but rather a friend of his uh Jim Johnson the chairman of American Express and namely the company's Investment Bank Arm sherson Leman uh which yes is in fact the same Leman that would eventually go and kick off the 2008 financial crisis with its own failure but that's decades from now going back to the 80s we have a typical work Montage after which we have this meeting where
the president of sherson Leman Peter Cohen is meeting with Ross to outline their leverage biod deal for RJR abiso with them highlighting that while the stock is currently trading at 53 and an e uh they'll go ahead and offer $75 a share for the company uh which is notably higher than any previous High the stock has ever reached now we touched on this before but as for why we're hearing the stock priced with a fraction it's actually how stocks used to be quoted up until 2001 which is when we switched decimals before that point the
smallest price unit between stocks was actually 6.25 or 1116 of a dollar which from what I've read on the matter is because America used to use Spanish coins as legal tender uh which themselves were divisible into eights and this convention of uh dividing dollars into eights and later 16s was just carried over into the New York Stock Exchange when it was first founded with us again only seeing all stocks on the exchange quoted in decimals by the end of 2001 and as for why Ross and his gang are offering a higher price than the current
stock price that they could otherwise get on the open market Market uh that's because they're trying to convince the board of directors to vote in favor of this acquisition uh which would mean they wouldn't have to go to the open market and buy all the shares of the company which can get complicated yes there's currently a lower price that they could acquire at but as they try and buy more and more of the shares that's likely going to push the stock price higher and could end up being more expensive than this uh tender offer which
just involves the board of directors voting and deciding whether to move forward with it and as a movie also highlights a higher stock price will help fend off competition uh and other bids that might come for the company and despite how much more they're paying for the company to acquire it we see it alluded to that Ross is still going to make a massive payoff uh if this steel moves forward are these figures for real unfortunately for us however before he's able to quietly uh seal the deal news of the arrangement gets out and starts
making headlines given that it again represents the largest Takeover in corporate US history and we quickly see The Barbarians at the gate as a biding War ensues and everyone tries to get a piece of the action Henry kvis himself seemingly out of Pride and and anger that Ross took his idea and went ahead with someone else makes his own tender offer for the company at $90 a share a bunch of small retail investors start buying in including some strangers who overhear the executives talking about their deal and we really see all the chaos as Ross
attends a seemingly squar dance political fundraiser where everyone's soliciting him to try and get in on the deal Wally MCN I'm with Drexel Burnham with one of the notable individuals being Ted Forceman again real person and key competitor to KKR who tries to convince Ross that the company's basically evil and that he should really not work with them and should work with him instead with him later being the one to allude to the title of the film the bastards are at the city Gates let's stand at the bridge together let's stand at the bridge and
push the barbarians back right which to his passionate point in addition to the Cutthroat operations and the sketchy sort of junk bond dealings uh private Equity has been accused of being pretty detrimental to the areas that it operates within not just decreasing the quality of service in important areas like healthcare but but notably carrying out sizable layoffs and contributing to unemployment especially within the retail sector and even in the film we see these sort of dark consequences mentioned uh with the previous KKR takeover of Safeway the grocery teain 18 years he drove a truck for
them Ross 18 years parked the truck one last time he went home and he shot himself but for Ross that's not really the deal breaker uh while he does try to negotiate with Henry kravis and KKR to try and see if they can work together at $90 a share to avoid any further competition uh things ultimately fall apart as one Henry kavis demands that they use Drexel Burnham lomber to raise the funds for the deal rather than sheers and Leman and two despite what they talked about in their initial discussions they now expect Ross to
reign in his spending and that he won't be able to really control a ship as he wants which for Ross obviously unacceptable and the competition's back on now fast forwarding a little bit we get another 80s Montage of everyone uh working I guess a few things happen we find out that KKR is working with an Insider to price out their deal none other than the president of Nabisco himself Johnny grenis who I said with matter earlier come on keep up people also find out that Premier tastes like crap but the big twist that ultimately leads
to ross' downfall here is that his deal with shearon Leman to take over the business gets leaked to the Press uh with the world finding out that Ross stands to receive $2.5 billion if shearon Leman is successful in acquiring the business with this representing the share of the company Ross would stand to acquire at essentially no cost to himself a headline that ultimately costs Ross the deal while shearon Leman does come out with the highest bid at the end of $112 a share the board ultimately decides to go forward with kkr's final bid of $19
a share or $25 billion for the entire company because they're seemingly just peeved off by Ross's greed I'd say the deciding factor the one thing that made the kravis offer more attractive was the fact that you were not part of it and so RJR abisco goes to KKR for whopping $25 billion investors get a massive payoff and our poor protagonist Ross flies home commercial but don't worry because in the closing scenes as the film concludes we find out that he would end up with a $53 million settlement as he went out the door or 23
million after tax and that's the film and the spectacle that was the RJR Nabisco leverage buyout all of which again stayed pretty true and accurate to the real life events and today RJR and abisco do continue to exist albeit now under different companies as someone finally realized that made more sense and when may not have heard of any of this these events did play a pretty important role in drawing more public awareness and criticism to the greed of Wall Street and just the general unethical practices that happen in the space which Speaking of let's take
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stuff it does help the channel tremendously and let me know your thoughts on the movie RJR Nabisco especially if you were around when all that played out we love to hear uh your own kind of experience with the situation but for me it's just a movie I saw that I thought made a good candidate for diving into thanks again for joining me see you in the next one
